Tax deduction changes for holiday home rental property owners
The ATO released a new draft ruling in November 2025, which will target holiday rental properties that are not genuinely available to rent for the public or used in a major capacity for personal use. The draft ruling is proposed to apply from 1 July 2026 will potentially have significant tax implications for some owners as they will deny rental property expense deductions if the property falls into points explored in our latest article.
Some factors that indicate your rental property will fall foul of these new rules are:
- Private use of the property is prioritised over income generation.
- The private use periods often fall in the periods where maximum rent for the property can be achieved i.e. Christmas, Easter, public holidays etc.
- The property is advertised for very restrictive terms i.e. for a minimum of four nights or excess night rate, the property in this scenario is not genuinely available for rent.
No one factor above carries more weight in determining whether the property will be impacted by these new criteria, as an objective conclusion needs to be reached factoring in all points.
Under this new guidance, rental properties will be deemed a ‘leisure facility’ and there are specific provisions within the Tax Act that the ATO can use to deny property deductions in relation to holding costs. Some examples of these expenses that will be denied are loan interest, rates and taxes, maintenance etc. This would limit deductions to those specifically incurred to generate any income such as advertising fees, commissions and cleaning costs. Previously we may have been able to apportion all property expenses to the income producing periods vs private use periods, but if the property is deemed a leisure facility, the ruling will not allow these apportionments moving forward.
It is believed that any deductions that are denied could be added to cost base and used to offset any capital gain if sold in future. The ATO have issued approximately 14 examples of how a holiday home might be impacted by these changes. Two examples are shown below:
Example 1
An example issued by the ATO shows a property used for private purposes for approximately one month during the year, but in the peak holiday periods of Christmas and school holidays, the ATO indicate this would fall into a leisure facility category. As such, deductions would be denied for any property holding cost including interest, rates, insurance, repairs etc.
Example 2
In a scenario where a property is being rented for below market value or non-arm’s length rate, the ruling indicates the property is mainly being used to generate assessable income as it’s rented for a whole year and would be allowed to claim deductions. However, this will still require an apportionment of all expenses to match the reduction in rental income.
The ATO have provided a table summary of points they consider key to whether your property arrangement will fall into a low to high-risk category along with chances of audit activity:
| Risk zone | Behaviour for section 26-50 |
|
Green zone Commissioner would not have cause to apply compliance resources |
Factors pointing to high income producing usage:
|
|
Amber zone Commissioner may have cause to apply compliance resources |
Factors that point to lower commercial exploitation:
|
|
Red zone Arrangements will attract Commissioner's attention |
Little or no commercial exploitation of property to produce income:
|
The draft ruling – which is still in the final stages of review – could still have changes made to the final guidance, but it does appear holiday homes are in the gun.
If you need help navigating this in your business or wish to discuss this further, please contact us.